Getting a car loan can be exciting, but it’s important to avoid some common mistakes that could make your car loan interest rate higher than necessary. Whether you're using a traditional lender or loan apps, understanding these pitfalls will help you save money.

1. Skipping Research on Lenders and Rates

One of the biggest mistakes is not researching lenders before choosing one. Banks, credit unions, and loan apps all offer car loans, but their rates and terms can vary widely. When you don’t compare options, you might end up with a higher car loan interest rate. Spend time comparing several lenders to find a competitive rate. This can be especially important if you’re looking for a used car loan interest rate, as these can be slightly higher than new car loan rates.

2. Having a Low Credit Score

Your credit score plays a huge role in determining your car loan interest rate. The lower your credit score, the higher the rate lenders are likely to offer. If you have a poor credit score, lenders may view you as a higher risk, resulting in a more expensive loan. If you can, work on improving your credit score before applying for a loan. Small improvements, such as paying down outstanding debts and making on-time payments, can make a big difference.

3. Opting for a Long Loan Term

While a longer loan term can lower your monthly payments, it often leads to a higher car loan interest rate overall. Lenders charge more interest over extended terms, which could mean paying thousands more than you would on a shorter-term loan. Generally, car loans range from 36 to 72 months, but shorter terms almost always result in lower interest rates. So, while a five- or six-year loan may look affordable month to month, it can be more costly in the long run. Stick with a shorter term to save on interest.

4. Not Making a Down Payment

Many lenders encourage borrowers to make a down payment because it reduces the loan amount, which can lead to a lower car loan interest rate. Skipping the down payment means you’re financing the entire cost, which makes the loan riskier for lenders and can lead to a higher interest rate. Even a small down payment can reduce the total interest you pay, especially when looking at a used car loan interest rate, which may already be a bit higher than that of a new car loan.

5. Taking Add-ons from the Dealer

Dealers often offer add-ons like extended warranties or special insurance products, but rolling these extras into your loan can raise your car loan interest rate. These costs increase the loan amount, which may increase the rate you’re offered. It’s often cheaper to purchase these add-ons separately if you really want them, rather than including them in your loan. This way, you avoid paying interest on these extras for years.

Conclusion

When it comes to car loans, small mistakes can add up to a much higher interest rate and a bigger financial burden. Take the time to research your options, work on your credit score, and choose a loan term that balances your monthly payment and interest rate. With a bit of planning, you can keep your car loan interest rate as low as possible, whether you're borrowing for a new or used car.